A New Study Reveals the 20 Factors That Predict Startup Failure: Do Any Apply to You?
Entrepreneur's New Year’s Guide
You already know that the majority of startups eventually fail. The pervading myth is that between 80 and 90 percent of startups fail within the first few years -- and, in reality, it's not quite that bad.
In fact, the real stats vary, but most are closer to a base line of 50 percent.
For example, the Bureau of Labor Statistics claims that about 50 percent of new businesses survive five years or more, with 33 percent surviving 10 years or more. And a Harvard Business School study found that 75 percent of VC-backed startups studied eventually failed.
To the passionate entrepreneur, of course, these stats are intimidating, but they are ultimately meaningless; after all, if you truly believe in your idea, you’ll believe yourself to be in thepercentage of businesses that succeed, and you’ll ignore the failure statistics because you won't believe they apply to you.
But what’s important here isn’t the sheer number of businesses that fail; it’s the information we can glean on why they failed, and how those failures can be prevented. A study by CB Insights, the venture capital database, recently delved into these motivations, seeking to explain the majority of startup failures. Because I found the study eye-opening, I'll share its highlights here:
Debuting in 2014, CB Insights started its study by reading, in detail, the post-mortem statements of 50 entrepreneurs whose startup ventures had recently failed. After several years and several updates (the most recent coming out last October), the study now comprises 242 individual post-mortem letters, each detailing the reasons behind the startup’s failure. You can read each of the post-mortem letters individually here.
The "Top 20" factors
So what were those 20 factors behind startup failure? In fact, they represented nearly all instances of startup failure, starting with the most popular and descending to the least popular:
1. No market need. A whopping 42 percent of post-mortem letters admitted that a lack of market need in some way contributed to those businesses' demise. For example, Patient Communicator wrote that the majority of doctors simply wanted more patients, not a more efficient office.
2. Lack of cash. Even if your business is profitable on paper, if you don’t have enough cash to pay your employees or vendors, you could go under. About 29 percent of post-mortems listed running out of cash.
3. Inappropriate team. Your team is the driving force to make your vision a reality. If these employees don’t have the experience, the passion or the problem-solving skills to execute and improve on your idea, you’re dead in the water, like the 23 percent of startups that referenced team issues as an ingredient in their failure.
4. Strong competition. Sometimes, the competition is just too fierce to take on. For example, upon Wesabe’s demise, its founder revealed that the company just couldn’t compete with Mint. It’s one of the 19 percent of companies that referenced competition.
5. Pricing and cost issues. Profitability is a simple equation of your costs against your pricing. If you set the prices too high, you won’t be able to compete, but if you set them too low, or your costs are too high, you won’t be profitable, like the 18 percent of companies that mentioned it.
6. Bad core product. About 17 percent of companies admitted their product wasn’t good enough to make the company succeed. Without a strong product, it’s virtually impossible to grow.
7. Lack of a business model. A surprising 17 percent of startups admitted not having a business model to drive their efforts. They came to market with a product, or an idea, but no infrastructure to back it.
8. Bad marketing. “Bad marketing” here refers to one of a few different possible causes, including too much money spent on marketing, ineffective marketing or a single bad campaign that trashed the startup's reputation. Some 14 percent of companies cited this reason.
9. Customer neglect. eCrowds is one of the 14 percent of companies that cited customer neglect as a main reason for failure; eCrowds ignored or de-prioritized customer feedback, and couldn’t improve its product as a result.
10. Bad timing. When good ideas come too early, the market may not yet be ready to buy. When they come too late, the market is saturated. Roughly 13 percent of companies claimed this as a primary reason for failure.
11. Loss of focus. Strong starts and passionate leaders aren’t always sustainble for the long term. When you lose your focus halfway through a development cycle, your team can crumble; 13 percent of companies cited a lack of focus.
12. Intra-team conflicts. Infighting isn’t good for any organization, especially when it’s among high-ranking team members, or worse, partners and investors. About 13 percent of failed companies cited this as a reason.
13. A pivot gone bad. When your original plan isn’t working out, you pivot -- but if that pivot goes in an unprofitable direction, your startup won’t last long. Ten percent of companies in the list tried to pivot and failed.
14. Lack of passion. If you try to build a business without really being passionate about it, you are much less likely to be successful, like the 9 percent of companies that claimed lack of passion as the main reason for their failure.
15. Bad location. Meetro is one of the 9 percent of companies that cited a bad location as a reason for their failure; the startup worked perfectly well in Chicago, but could not expand to other urban areas because it failed to adequately grab the attention of those residents.
16. Lack of financing or investor activity. Like a lack of cash, a lack of initial investor interest caused 8 percent of startups in the study to fail prematurely.
17. Legal hurdles. Whether it was getting sued, navigating legal disputes or trying to establish a legal operation, 8 percent of startups succumbed to challenging legal hurdles.
18. A lack of advisors or network. You don’t need a mentor to build a business, but it certainly helps to get that outside expertise; 8 percent of startups admitted to not having a network, and not having advisors to help guide them in their decision-making.
19. Burnout. I’ve written about the dangers of entrepreneurial burnout before. The data indicates that 8 percent of startups get closer to failure when their entrepreneurs burn out.
20. A failure to pivot. Though pivoting incorrectly can lead to failure, not pivoting at all can be nearly as bad, with 7 percent of failed startup entrepreneurs wishing they would have pivoted when they needed to.book -- you’ll greatly improve your chances of eventual success -- and almost surely avoid failure.